Swiss Accounting Guidelines for Staking
We’re glad to announce that the Crypto Valley Association’s Tax & Accounting Working Group has successfully collaborated with EXPERTsuisse on an update of the Position Paper on Crypto Currencies, which now includes a section on the accounting treatment of staking rewards under the Swiss Code of Obligations.
The updated position paper can be accessed on this article, and it is available in German or French
Let’s dive into the details!
The update describes the accounting treatment of two specific staking scenarios relating to the Ethereum blockchain: i) self-staking and ii) delegated staking
Although the principles stipulated in the position paper are of a general nature, their applicability to a specific proof-of-stake blockchain needs to be assessed on a case-by-case basis as such other blockchains can have significantly different technical specifications.
Self-Staking on Ethereum
Start of staking: The mere deployment of ETH to its own validator node does not trigger any accounting consequences.
Receipt of staking rewards: Upon receipt of the staking rewards into the validator’s wallet (both block-rewards and transaction fees earned as priority fees from the transaction sender), these staking rewards (ETH) need to be recognised as revenue from services at the observable market price on the date of receipt. In case the self-staking activity does not represent a main or key activity of the validator, the inflow of the staking-rewards can be captured under financial income. If there is no active market (e.g., if the available price information is not based on current transactions between third parties or the trading or market volume of the corresponding cryptocurrency is so low that an immediate sale of the staking rewards would have a significant impact on the price) or no reliable market data is available, the staking rewards must be recognized at cost. As these are generally negligible in the case of staking rewards, a pro memoria value can also be recognized for reasons of practicability and prudence.
Subsequent valuation: The subsequent valuation of these staking rewards follows the established accounting principles (i.e., either at lowest value or at observable market price) and is taken into account via the financial income position.
Disposal: Lastly, upon the disposal of any of these staking rewards, again any accounting effect is booked via the financial income. Please note, however, that in the event of a sale in exchange for another token (instead of fiat currency), there is an option to recognize the tokens received either at the prudently estimated market price, or at the carrying amount of the tokens surrendered.
Delegated Staking on Ethereum
The delegator’s accounting treatment follows closely the consideration for the self-staking activities, with the difference that the receipt of staking-rewards is directly booked via the financial income (and not as revenue). This is due to the fact that usually the delegated staking activities do not represent a main or key business activity of the delegator.
The validator recognises any staking rewards as revenue from services at the observable market price and recognises a corresponding delegation expense booking to reflect on the rewards “forwarded” to the delegator. Any subsequent valuation and disposal effects are routed via the financial income position.
Bitcoin Mining
If you are an attentive reader, you might have already noted that the above-contemplated accounting treatment for staking rewards significantly deviates from the general accounting practice for mining rewards (e.g. Bitcoin) which is, however, not covered by the position paper.
In the case of Bitcoin, the received mining rewards can only be recognised at costs upon receipt as the mining activities serve the procurement of such Bitcoins. The full realisation of the market value of the Bitcoin only happens upon their disposal.
The difference in the timing of this realisation sits mainly with the fact that there are several miners competing with each other gaining the next block-reward which comes with a considerable amount of operational uncertainty regarding the generation of rewards despite substantial initial investment. Moreover, a miner can cease operations at any moment without negative consequences, compared to slashing risks for staking.
Conclusion
It is fair to say as a final comment that technical nuances impact the accounting treatment of staking, but als mining rewards. Although we're very glad to be in the position to have such guidance in place, it will not substitute any detailed assessment of the facts and circumstances at hand, especially if you are operating on proof-of-work or proof-of-stake blockchains other than Bitcoin or Ethereum.
The Crypto Valley Association’s Working Group Tax & Accounting is dedicated to further observe the evolution of the tax and accounting practices for any crypto-related activities and will keep on contributing to increase clarity and transparency. In case of questions or doubt, please do not hesitate to contact any member of the Working Group. We are happy to support you!